SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-23669
SHOE PAVILION, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware 94-3289691
(State or Other Jurisdiction of Incorporation (IRS Employer
or Organization) Identification Number)
3200-F Regatta Boulevard, Richmond, California 94804
(Address of principal executive offices) (Zip Code)
(510) 970-9775
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ]. No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock outstanding as of August 5, 1999 was 6,800,000 shares
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a "safe harbor" for these types of statements. These
forward-looking statements are subject to risks and uncertainties that could
cause the Company's actual results to differ materially from management's
current expectations. These factors include, without limitation, expansion into
a new geographic region, competitive pressures in the footwear industry, changes
in the level of consumer spending on or preferences in footwear merchandise, the
Company's ability to purchase attractive name brand merchandise at financially
reasonable discounts and the availability of desirable store locations as well
as management's ability to negotiate acceptable lease terms and open new stores
in a timely manner. Other risk factors are detailed in the Company's filings
with the Securities and Exchange Commission. The Company assumes no obligation
to update forward-looking statements.
SHOE PAVILION, INC.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements (Unaudited) Page
----
Condensed Consolidated Balance Sheets........................... 3
Condensed Consolidated Statements of Income..................... 4
Condensed Consolidated Statements of Cash Flows................. 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 7-9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk...... 9
PART II
OTHER INFORMATION
Item 6 - Exhibits And Reports on Form 8-K................................ 10
2
PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
The following financial statements and related financial information are
filed as part of this report:
Shoe Pavilion, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data) July 3 January 2 June 30
1999 1999 1998
ASSETS
Current assets
Cash $ 902 $ 1,922 $ 323
Inventories 30,501 26,892 24,888
Prepaid expenses and other 650 257 298
------- ------- -------
Total current assets 32,053 29,071 25,509
Property and equipment, net 4,631 3,835 2,382
Other assets 646 628 573
------- ------- -------
Total assets $37,330 $33,534 $28,464
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 8,927 $ 5,967 $ 8,284
Accrued expenses 514 946 602
Line of credit 8,000 8,407 3,200
Current portion of long-term obligations 13 12 21
------- ------- -------
Total current liabilities 17,454 15,332 12,107
Deferred rent 1,394 1,098 942
Long-term obligations, less current portion 68 75 71
Stockholders' equity
Common stock- $.001 par value: 15,000,000 shares authorized;
issued; 6,800,000 7 7 7
Preferred stock- $.001 par value; 1,000,000 shares authorized;
no shares issued or outstanding - - -
Additional paid-in capital 13,968 13,968 13,968
Retained earnings 4,439 3,054 1,369
------- ------- -------
Total stockholders' equity 18,414 17,029 15,344
------- ------- -------
Total liabilities and stockholders' equity $37,330 $33,534 $28,464
======= ======= =======
See notes to condensed consolidated financial statements.
3
Shoe Pavilion, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share and operating data)
Three Months Ended Six Months Ended
July 3 June 30 July 3 June 30
1999 1998 1999 1998
Net sales $17,190 $13,386 $31,443 $24,837
Cost of sales and related occupancy expenses 11,167 8,591 20,763 16,232
------- ------- ------- -------
Gross profit 6,023 4,795 10,680 8,605
Selling, general and administrative expenses 4,520 3,628 8,138 6,636
------- ------- ------- -------
Income from operations 1,503 1,167 2,542 1,969
Interest and other, net 137 52 271 169
------- ------- ------- -------
Income before taxes 1,366 1,115 2,271 1,800
Income tax provision 524 429 886 92
------- ------- ------- -------
Net Income $ 842 $ 686 $ 1,385 $ 1,708
======= ======= ======= =======
Earnings per share:
Basic $ 0.12 $ 0.10 $ 0.20 $ 0.28
Diluted $ 0.12 $ 0.10 $ 0.20 $ 0.28
Weighted average shares outstanding:
Basic 6,800 6,800 6,800 6,114
Diluted 6,800 6,845 6,802 6,142
PRO FORMA
Historical income before taxes on income $1,800
Pro forma provision for income taxes 687
------
Pro forma net income $1,113
======
Pro forma earnings per share:
Basic $ 0.17
Diluted $ 0.17
Pro forma weighted average shares outstanding:
Basic 6,493
Diluted 6,521
Stores Open at end of period 76 58
See notes to condensed consolidated financial statements.
4
Shoe Pavilion, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended
July 3 June 30
1999 1998
Operating Activities:
Net income $1,385 $1,708
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation and amortization 549 362
Deferred taxes (23) (485)
Cash provided (used) by changes in:
Inventories (3,609) (5,093)
Prepaid expenses and other current assets (393) (225)
Accounts payable 2,960 2,363
Accrued expenses (432) (241)
Other assets 5 220
Deferred rent 296 46
------ ------
Net cash provided (used) by operating activities 738 (1,345)
------ ------
Investing Activity-
Purchase of property and equipment, net (1,345) (669)
------ ------
Financing Activities:
Net proceeds from initial public offering - 14,108
Payments on line of credit (407) (4,187)
Principal payments on capital leases (6) (179)
Distributions paid to stockholder - (7,800)
------ ------
Net cash provided (used) by financing activities (413) 1,942
------ ------
NET DECREASE IN CASH (1,020) (72)
CASH, BEGINNING OF PERIOD 1,922 395
------ ------
CASH, END OF PERIOD $ 902 $ 323
====== ======
See notes to condensed consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
General - The accompanying unaudited condensed consolidated financial statements
have been prepared from the records of the Company without audit and, in the
opinion of management, include all adjustments necessary to present fairly the
Company's financial position at July 3, 1999 and June 30, 1998 and the interim
results of operations and cash flows for the three and six months then ended.
The balance sheet as of January 2, 1999 presented herein, has been derived from
the audited financial statements of the Company as of January 2, 1999.
Accounting policies followed by the Company are described in Note 2 to the
audited consolidated financial statements for the year ended January 2, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted for purposes of the condensed consolidated
interim financial statements. The condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements, including the notes thereto, included in the Company's annual report
on Form 10-K for the year ended January 2, 1999.
The results of operations for the three and six-month periods presented herein
are not necessarily indicative of the results to be expected for the full year.
Public Offering - On February 27, 1998 the Company sold 2,300,000 shares of its
common stock for net proceeds of $14,107,651. In connection with the offering,
the Company terminated its status as an S corporation and recorded a deferred
tax benefit of $485,000.
Comprehensive Income and net income are the same.
2. Pro Forma Information
The objective of the pro forma information is to show what the significant
effects on the historical information might have been had the Company not been
treated as an S Corporation for tax purposes prior to the February 23, 1998, the
effective date of the Company's initial public offering.
Income Taxes - The pro forma information presented on the condensed consolidated
statements of income reflects a provision for income taxes at an effective rate
of 38.5% for the six months ended June 30, 1998.
Pro Forma Earnings Per Share - Pro forma basic earnings per share is based on
the weighted average number of shares of common stock outstanding during the
period plus the estimated number of shares offered by the Company (1,271,650
shares) which were necessary to fund the $7,800,000 distribution paid to the
Company's stockholder upon termination of the Company's status as an S
Corporation. Pro forma diluted earnings per share is calculated using the
number of shares used in the basic calculation plus the dilutive effect of stock
options outstanding during the period.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
Shoe Pavilion is the largest independent off-price footwear retailer on the
West Coast that offers a broad selection of women's and men's designer label and
name brand merchandise. The Company operated 76 retail stores in California,
Washington and Oregon as of July 3, 1999 compared to 58 stores as of June 30,
1998.
Results of Operations
Net sales increased 28.4% to $17.2 million for the second quarter ended July
3, 1999 from $13.4 million for the second quarter of 1998. Net sales for the six
months ended July 3, 1999 were $31.4 million, a 26.6% increase from sales of
$24.8 million for the six months ended June 30, 1998. This increase in net sales
was attributable to a 1.1% increase in comparable store sales for the three-
month period ended July 3, 1999 and relatively flat comparable store sales for
the six month period ended July 3, 1999. New stores sales contributed $4.7 and
$7.8 million for the three and six-month periods ended July 3, 1999,
respectively.
Gross profit increased 25.6% to $6.0 million for the second quarter ended July
3, 1999 from $4.8 million for the second quarter of 1998, but decreased as a
percentage of net sales to 35.0% from 35.8% for the comparable period in 1998.
Gross profit for the six months ended July 3, 1999 increased 24.1% to $10.7
million from $8.6 million for the six months ended June 30, 1998, but decreased
as a percentage of net sales to 34.0% from 34.6% for the comparable period in
1998. The decrease in gross profit as a percentage of net sales for the three
and six month periods ended July 3, 1999 was primarily attributable to higher
fixed occupancy costs as a percentage of net sales.
Selling, general and administrative expenses increased 24.6% to $4.5 million
for the second quarter ended July 3, 1999 from $3.6 million for the second
quarter of 1998, but decreased as a percentage of net sales to 26.3% from 27.1%
for the comparable period in 1998. Selling, general and administrative expenses
increased 22.6% to $8.1 million for the six months ended July 3, 1999 from $6.6
million for the six months ended June 30, 1998, but decreased as a percentage of
net sales to 25.9% from 26.7% for the comparable period in 1998. The decrease in
selling, general and administrative expenses as a percentage of net sales for
the three and six month periods ended July 3, 1999 was primarily attributable to
the leveraging of advertising and promotional expenses.
Interest expense and other, net increased 163.5% to $137,000 for the second
quarter ended July 3, 1999 from $52,000 for the second quarter of 1998.
Interest expense and other, net increased 60.4% to $271,000 for the six months
ended July 3, 1999 from $169,000 for the six months ended June 30, 1998. The
increase for the three and six month periods ended July 3, 1999 was attributable
to higher average borrowings on the Company's revolving line to support
increased inventory levels for new stores.
Liquidity and Capital Resources
Historically, the Company has funded its cash requirements primarily through
cash flow from operations, borrowings under its credit facility and in 1998 with
proceeds from its initial public offering. Net cash provided by operating
activities for the six months ended July 3, 1999 was $738,000. Net cash used in
investing activities for the six months ended July 3, 1999 totaled $1.3 million
and was used primarily for the purchase of property and equipment. Net cash used
in connection with financing activities totaled $413,000 for the six months
ended July 3, 1999, of which $407,000 was used for repayments on the Company's
line of credit.
7
Capital expenditures for the six months ended July 3, 1999 were primarily for
the build-out of ten new stores plus construction-in-progress of one additional
store and the Company's new management information systems. The Company's
primary cash requirements have been related to capital expenditures for new
stores including merchandise inventory for such stores and leasehold
improvements. During the remainder of 1999, the Company anticipates that cash
will be used primarily for merchandise inventory and capital expenditures. The
Company estimates that the cost of capital expenditures for fiscal 1999,
excluding the cost of any possible acquisitions, will total approximately $2.5
million, primarily for the build-out of approximately 15 to 20 new stores and
costs associated with the Company's management information systems.
The Company has a credit facility agreement with a commercial bank, which
includes a revolving line of credit for $15.0 million expiring on December 31,
2000. As of July 3, 1999, the unused and available portion of the credit
facility was approximately $7.0 million. The Company believes that operating
cash flow and borrowings under its credit facility will be sufficient to
complete the Company's 1999 store expansion program and to satisfy the Company's
other capital requirements through the end of fiscal 1999.
Impact of Year 2000
The Company is currently in the process of addressing a problem that is facing
all users of automated information systems. The "Year 2000 Issue" is the result
of computer programs being written using two digits rather than four to define
the applicable year. Computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
situation could result in a system failure or miscalculations causing
disruptions to operations, including, among other things, a temporary inability
to process transactions, send payments, or engage in similar normal business
activities.
State of Readiness. Beginning in early 1998, the Company began an overall
assessment of its computer systems, including Year 2000 readiness. The Company
determined that certain of its software was not Year 2000 compliant. In mid-
1998, the Company, with the guidance of outside consultants, implemented a plan
to replace its existing information systems primarily in response to business
demand and growth. The new systems are designed to replace the Company's
information systems for order processing, warehousing, finance and point-of-sale
on a fully integrated enterprise-wide basis. These systems will replace
existing software that is not Year 2000 compliant.
The Company has used both internal and external resources to replace and test
its information systems software for Year 2000 compliance. An Executive
Oversight Steering Committee, consisting of internal executive management, the
Company's information systems officer and various outside third parties, was
formed to supervise the replacement, implementation and testing process.
Installation of the new systems began in June 1998, and Company personnel have
been trained on the new systems. The Company estimates that the installation of
the new systems will be completed by the end of the third quarter of 1999.
The Company has begun communicating with significant suppliers to determine
the extent to which the Company may be vulnerable to a failure by any of these
third parties to remediate their own Year 2000 issues. The Company's exposure to
supplier-related Year 2000 business disruptions is reduced because it does not
currently communicate electronically with its suppliers. In addition to
suppliers, the Company also relies upon governmental agencies, utility
companies, telecommunication service companies and other service providers
outside of the Company's control. There can be no assurance that the Company's
suppliers, governmental agencies or other third parties will not suffer a Year
2000 business disruption that could have a material adverse effect on the
Company's business, financial condition and operating results. The Company has
not been informed by any supplier of inability to comply with year 2000 issues.
Costs to Address the Year 2000 Issue. The Company has incurred, through July
3, 1999, approximately $1.8 million relating to the implementation of the new
systems and addressing Year 2000 issues. The Company currently estimates that
the total costs for implementing the new systems will be approximately $2
million. Included in the costs of implementing the new systems is the cost of
equipment which the Company presently leases over 36 to 60 months. The Company
will capitalize and depreciate the new systems technology over its estimated
useful life and to the extent that Year 2000 costs do not qualify as capital
investments, the Company will expense such costs as incurred.
The costs of Year 2000 compliance and the date on which the Company believes
it will complete the project are based on management's best estimates, which
were derived utilizing numerous assumptions of future events, including the
continued availability of certain third party resources and other factors.
However, there can be no
8
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, supplier compliance and contingency actions,
and similar uncertainties. Based on presently available information, the
Company's total Year 2000 project costs do not include any estimated costs and
time associated with anticipated third party Year 2000 issues.
Risks Presented by the Year 2000 Issue. The Company presently believes that
with the implementation of new systems and conversion to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. It should be noted, however, that in the event any third parties which
provide goods or services essential to the Company's business activities fail to
address appropriately their Year 2000 issues, such failure could have a material
adverse effect on the Company's business, financial condition and operating
results. For example, a Year 2000 related disruption on the part of the
financial institutions which process the Company's credit card sales would have
a material adverse effect on the Company's business, financial condition and
operating results.
Contingency Plans. The Company's Executive Oversight Steering Committee is
developing contingency plans in the event that the Company has not completed all
of its remediation plans in a timely manner or any third parties who provide
goods or services essential to the Company's business fail to appropriately
address their Year 2000 issues. The committee expects to conclude the
development of these contingency plans by the end of the third quarter of 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes from the information reported in the
Company's annual report on Form 10-K for the fiscal year ended January 2, 1999.
9
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
10.1 License Agreement dated July 7, 1999 between Richman Gordman 1/2
Price Stores, Inc. and Shoe Pavilion, Inc.
27.1 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended July 3, 1999:
None.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 5th day of August 1999.
SHOE PAVILION, INC., as Registrant
By /s/ Dmitry Beinus
---------------------------------------
Dmitry Beinus
Chairman and Chief Executive Officer
By /s/ Gary A. Schwartz
---------------------------------------
Gary A. Schwartz
Vice President and Chief Financial Officer
11
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
10.1 License Agreement dated July 7, 1999 between Richman Gordman
1/2 Price Stores, Inc. and Shoe Pavilion, Inc.
27.1 Financial Data Schedule